Mel Watt: Here's where the FHFA will increase regulation

Affordable housing, the inclusion of more minorities and women

The director of the Federal Housing Finance Agency, Mel Watt, will break his five-month stint of public silence at the Brookings Institute on May 13.

But that should not be mistaken for leading the quiet life at his workplace.

In fact, just yesterday Watt spoke to the presidents of the Federal Home Loan Banks about where the FHFA will increase oversight and regulation in the coming months. His choice of where to reform may surprise you.

Yes, the role of FHFA is most notably as conservator of the government-sponsored enterprises, Fannie Mae and Freddie Mac. However, he saved any commentary on housing reform progress for the Brookings Institute.

Still, I find Watt a fascinating subject to follow. And his words at the FHLB Annual Directors Conference showed a practicality to his approach, not unlike his predecessor Ed DeMarco. Early on Watt's approach seems to follow the 'speak softly and carry a big stick' policy.

And here's how he put that to use when speaking to the directors.

First he cited improvements at the FHLB, where income trends, advance volume and capital strength have all increased. This is to the credit of the FHLBs and no doubt softened up the directors before Watt began to deliver his directives for the goals of the FHFA.

For one, he warned of the growth of advances to insurance companies, with a caveat that he is not opposed to such expansion.

He did mention that advances to insurance companies have increased from 1% of advances in 2000 to 14% in 2013 and the number of insurance company members in the System is now up to 290. Credit risk managers must watch this trend closely, Watt said, with an earlier mention that individual decisions at the FHLBs almost led to economic ruin at more than a few.

"One area of insurance company membership – captive insurers – deserves some additional attention," Watt said. "Captive insurance borrowing and membership in the FHLBank System raises a number of possible issues related to safety and soundness and access to the System. While I won’t elaborate on these issues today, you will certainly be hearing more about this as we move forward."

His conclusion, which really begins with his discussion on the topic of affordable housing, did offer a seeming contradiction. He begins by declaring the last 25 years of the Affordable Housing Program "a success."

From 1990 through 2013, the FHLBanks have contributed almost $5 billion in grants to fund affordable housing and this money goes to local businesses and community workers. Yet, despite this success, Watt is of the opinion that the AHP may be in need of a complete overhaul.

"FHFA will be conducting a thorough evaluation of the AHP and we intend to begin the rule-making process in 2015," he said. "We are asking program users to identify features of the AHP that should be retained and those that should be reconsidered."

He immediately followed this conversation with the need for the FHLBs to place a higher priority on including more minorities and women in their work. He reminded the directors, as per the order of Congress, that each FHLBank have a designated Office of Minority and Women Inclusion that is clearly identified in its organization chart and the OMWI Director must report to the CEO or COO equivalent.

His predecessor arguably fell short in this area, and Watt made it clear he intends to change that soon.

"You can anticipate that FHFA’s focus on OMWI activities and effectiveness, both internally at FHFA and at our regulated entities, will increase," he said. "In that regard, I will soon be naming a permanent OMWI Director at FHFA who will be working with each FHLBank to ensure full compliance with both the letter and spirit of the law. "

Jacob Gaffney is the Editor-in-Chief of HousingWire and HousingWire.com. He previously covered securitization for Reuters and Source Media in London before returning to the United States in 2009. While in Europe for nearly a decade, he covered bank loans and the high yield market, in addition to commercial paper, student loan, auto and credit card space(s). At HousingWire, he began focusing his journalism on all aspects of the housing and mortgage markets.